Classification of Aircraft Parts: Specific use or Generic use?

[HIREGANGE& ASSOCIATES]

Classification of goods is key concept in indirect taxation. It impacts rate of tax/duty, exemptions, preferential duties, import restrictions, etc. Classification of goods.  needs to be done without prejudice, taking various factors into consideration, such as, description of the goods, raw materials used, end use, understanding of the product in the market, etc. One of the key classification issues faced by taxpayers is classification of parts used in the manufacturing industry. In the ensuing paras, we seek to bring out key aspects to be considered in classification of parts of aircraft.

Rule 1 of the General Rules of Interpretation

Rule 1 of the General Rules of Interpretation provides that the titles of Sections, Chapters and Sub-Chapters are provided for ease of reference only and for legal purposes, classification shall be determined according to the terms of the headings and any relative Section or Chapter Notes. Aircraft, spacecraft, and parts thereof shall be classified under chapter 88, the relevant section being Section XVII. As per heading 8803 of the said chapter, “parts of aircraft” shall be classified thereunder.

On verbatim reading of the heading 8803, it may seem simple and straight forward that parts of aircraft merit classification under 8803. However, complication arises on referring to section notes of Section XVII. As per section note 2(b) parts of general use of base metals (section XV) shall not merit classification under section XVII. Moreover, section note 3 provides that parts of chapter 88 do not merit classification under 8803 if the said parts are not suitable for use solely or principally with aircrafts. Therefore, it can reasonably be concluded that parts of aircraft merit classification under 8803, if and only if the parts are for specific use in the aircraft and that the parts should not be of generic use which could be used anywhere.

Fasteners are specific to aircraft industry

In order to understand if these parts are of specific use, it is important to delve into the nature, characteristics and usage of these parts.

Screws, bolts, nuts, washers, rivets, collars, gaskets and pins, commonly known as ‘fasteners’ are used in great numbers in manufacturing aircrafts. To give a perspective, the Boeing Company’s 747 aircraft includes over 6 million parts, half of which are fasteners. This shows the importance of fasteners in aircraft industry.

Aerospace equipment and technology is often subjected to extreme environments, e.g., high pressures and temperatures from leaving the earth’s atmosphere or exposure to burning rocket fuel, they must be designed and manufactured to withstand these conditions, even down to the fasteners which hold them together. As a result, high-quality fasteners are required, suitable for the specifications and standards of the aerospace industry. Some of the characteristics which aerospace fasteners typically exhibit include:

• High tensile, shear, and fatigue strength to withstand extreme pressure
• Lightweight construction to help optimize lift in planes and minimize the fuel costs
• Operational capabilities in extreme environments
• Self-sealing and self-locking capabilities to prevent fluid and pressure leaks and loosening during operation

Usage of general (automotive & other engineering application) fasteners in aircrafts leads to premature failures. Hence, aircraft fasteners undergo an altogether different manufacturing route:

• Raw materials are typically produced and sourced only through approved manufacturers so that material properties and chemical composition is strictly ensured. Further, the prices of raw materials for manufacturing aircraft fasteners are typically higher by 3~6 times as compared to general fasteners and therefore, it makes it compatible exclusively for aircraft and space applications.
• Traceability: This mechanism/requirement is very unique to space and aircraft industry wherein the final parts are traced from the batch of melting (technically called as heat number) till the entire flow of manufacturing. Each fastener head is marked for identification example, material code, manufacturer code, drawing number, size etc, as per drawing requirement for traceability.

Aircraft parts are generally made of titanium. Titanium has both high strength and low density, its weight-to-strength ratio is excellent, this allows it to be used to reduce the weight of an aircraft without sacrificing the aircraft's structural integrity. Use of titanium in aircraft can also increase that aircraft's range while decreasing its fuel use. A lighter aircraft requires less fuel to fly, allowing for fewer re-fuelling stops and subsequently longer time periods spent in continuous flight. Fuel savings is directly proportional to the weight reduction of the vehicle.

Considering the cost of the raw materials and the detailed  manufacturing processes involved, it can reasonably be concluded that these fasteners are specific to the aircraft industry. Such parts of the aircraft industry cannot be used elsewhere given the cost. Similarly, parts of other industries cannot be used in the aircraft industry, given the specific requirements. Moreover, each manufacturer of aircraft has their own manufacturing process, consequently, such manufacturers have unique specifications while procuring the fasteners from suppliers and such suppliers are typically provided with the drawings of the manufacturer’s requirements. Therefore, fasteners manufactured by a supplier can be used only by a specific aircraft manufacturer and does not have universal application. Further, in order to undertake the manufacturing of fasteners for aviation business, an approval is required from the Directorate General of Civil Aviation (DGCA). Such detailed process certainly merits fasteners to be classified under CTH 8803, specifically under 88030000.

Grounds for litigation

The revenue authorities may allege that the fasteners are for generic use and could be used by any manufacturer. Consequently, they may state that such parts need to be classified as per the base metals, ie, iron and steel, titanium, Nickle, etc, under Section XV between Chapter 72 to 83.

Grounds to substantiate classification under 8803

• Reliance on Rule 1 of General Rules of Interpretation, wherein the section notes prescribe that parts of aircraft can be classified under 8803 if such goods are for specific use, which could be substantiated based on the grounds mentioned above. Reliance on Hon’ble Supreme Court in the case of THE COMMISSIONER OF CENTRAL EXCISE, BHUBANESWAR-I VERSUS M/S. CHAMPDANY INDUSTRIES LIMITED [2009 (9) TMI 7 - SUPREME COURT], wherein it was held that dominant intention of interpretation rules is that classification needs to be done basis most specific description over general description.
• A certificate may be produced from experts in aircraft industry to prove that parts are specific to aviation business and not of generic use and any other certifications obtained by manufacturers for meeting quality standards required for aircraft usage
• Reliance on G.S. AUTO INTERNATIONAL LTD. VERSUS COLLECTOR OF C. EX., CHANDIGARH [2003 (1) TMI 700 - SUPREME COURT] and IN RE: ONE STOP AIRLINE [2008 (1) TMI 375 - AUTHORITY FOR ADVANCE RULINGS], wherein it was held that parts of aircraft merit classification under 8803.
• Drawings issued by the manufacturers to procure specific fasteners
• Whether parts are of specific use or general use, is a question of fact than of law [MAK CONTROLS VERSUS COMMISSIONER OF CENTRAL EXCISE, COIMBATORE - 1998 (6) TMI 563 - CESTAT CHENNAI]. The same could be substantiated by actual facts of the case.
• Functional utility, design, shape and predominant usage have to be taken into account while determination of classification of item [OK. PLAY (INDIA) LTD. VERSUS COMMISSIONER OF C. EX., DELHI-III, GURGAON - 2005 (2) TMI 114 - SUPREME COURT]
• Business of the taxpayer (being aircraft manufacturers) needs to be taken into consideration
• DGCA approval provided to suppliers to manufacturers in the industry?
• In the matter of classification of goods, if there are two views possible, one in favor of taxpayer needs be adopted UNION OF INDIA AND ANOTHER VERSUS RAJ'S CONTINENTAL EXPORTS PRIVATE LIMITED - [1985 (6) TMI 34 - MADRAS HIGH COURT] and M/S. WS RETAIL SERVICES PRIVATE LIMITED VERSUS THE STATE OF KARNATAKA, COMMERCIAL TAX OFFICER (AUDIT) AND ASSISTANT COMMISSIONER OF COMMERCIAL TAXES, BANGALURU [2017 (11) TMI 864 - KARNATAKA HIGH COURT]
• If two or more headings seem equally applicable, then the goods would be classified in heading appearing last MAHINDRA & MAHINDRA LTD. VERSUS COLLECTOR OF C. EX., BOMBAY - 1998 (2) TMI 607 - CEGAT, NEW DELHI
• Judicial precedents of automobile and other manufacturers on classification of parts/ equipment can also be relied on.

Conclusion

It is a well settled position that parts of aircraft merit classification under CTH 88033000. However, the facts of each case need to be analyzed thoroughly before finalizing the classification. Wrong classification can have unintended consequences and may be subject to long drawn litigation process.

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